Health Insurance: Understanding "Stop Loss"

Friday, October 21, 2005

We are constantly the recipients of marketing messages. A marketer’s job is to make us think we couldn’t live without the AbBuster or the new Chicken Soft Taco. Well, insurance is no different. Our perception of what insurance is for is often influenced by what we’ve received from plans we have had in the past as well as what we feel constitutes “good” coverage. Thanks to marketing, we know what we want and we won’t settle for less!

But what if you have to pay for all of it yourself? What would you choose?

For those of us who are fortunate enough to have health insurance, it’s usually provided by our employer, or by our parent’s employer. While the job at Widget’s Inc. or The Bookchain Corp. may not be the best thing in the world, at least there’s free or inexpensively provided healthcare.

But what if you leave that company to pursue your musical dream? A quick look at the simple economics might lead you to decide that health insurance seems like an unaffordable luxury. But we urge you to think again. There are ways to engage in the health insurance system that ensure that you have coverage when you need it most, without breaking the bank.

Making Strategic Choices

On its face, health insurance sounds like a bad investment. An individual health insurance plan for a mid-30s male can cost anywhere from $100 to $300 a month. Add a spouse and children on that plan, and costs can reach up to $800 a month. This is for something that has an intangible benefit. Sure, you can go to the doctor for $10, but if feels like you’re paying $300 a visit with monthly premiums like this. It’s not surprising at all that many individuals/self-employed folks forego health insurance entirely, either because it feels like a bad investment or because they just can’t afford it.

But what if you’re in a car accident? What if circumstances lead to an extended hospital stay? In either of these cases, health care bills can pile up quickly, way beyond the monthly premiums paid on your “bad investment”.

This is why you are buying health insurance: to pay for what you could not afford to cover out of pocket should the worst happen. That’s really all it’s for, so let’s avoid getting bogged down in the little details that add expense to a plan and focus on the big picture; the acquisition of “stop loss” coverage.

Stop Loss: The Important Part

You probably want to pay a little as possible out of pocket when you visit the doctor. In insurance jargon that means you’re interested in a low per-visit copay. You probably also want to pay as little as possible out of your own pocket over the year on medical expenses, which means you want a low deductible, or the amount you pay yourself before the insurance company starts picking up the bills.

But picking these options – low copay, low deductible – means that your annual premium – or your total yearly payment – will be higher. If the sticker shock of that plan gets to you, you can lower your annual payment by choosing to pay more per visit (higher copay), and more out of pocket over the year (higher deductible). Here’s an example:

Copay

Deductible

Premium

Expensive plan

$10/visit

$250

$500/month or $6,000/year

Affordable plan

$30/visit

$2,500

$200/month or $1,200/year

Whether you pick an expensive plan or a more affordable plan, the important calculation is knowing the maximum you’d have to pay personally if you were stuck with huge medical bills: your Stop Loss amount. Let’s expand on our two examplesfrom above:

Copay

Deductible

Out of Pocket Max

Stop Loss

Expensive plan

$10/visit

$250

$3,000

$3,250

Affordable plan

$30/visit

$2,500

$4,000

$6,500

The Stop Loss amount is the most you are going to have to pay in a year. In our example above, if your hospital bills came to $50,000, you are responsible for $6,500. If your hospital bills are $750,000 in a year, you are responsible for $6,500.

We’re sure you see the pattern that’s emerging here, and how differences between expensive and affordable plans diminish when it comes to major medical expenses.

The Bottom Line

If you have very little money, it’s in your best interest to sign up for an affordable plan. In this scenario, you pay a little each month for the coverage that you’ll need should the worst happen. Yes, you will have to pay for routine visits, but if you’re healthy and active, do you expect to be at the doc’s office more than once a year? Might as well cough it up for those preventative care visits and know that if you roll the van, there will be costs to meet, but the burden will be much easier to bear. It’s a heck of a lot easier to organize a benefit to make $5,000 to meet your stop loss than it is to raise $80,000 to pay the actual hospital bill.

In our next article, we’ll investigate the pros and cons of Health Savings Accounts, or HSAs, which allow you to save money each month, tax-free, in a dedicated bank account and use that saved money for more services than you would get under regular health plans. You can even invest that money if you are the savvy sort. When piggy-backed with an affordable insurance plan, you can really maximize your benefits and increase your piece of mind at a reasonable price.

In any case, it’s in your best interest to reconsider what you think you know about what you actually need, and what you demand from your health insurance plan when you, your business, or your band is footing the entire bill.

Disclaimer: Future of Music Coalition provides basic health insurance information to answer your basic health insurance option questions. Insurance is regulated on a federal basis and by each state, and each insurance carrier rules and policy terms may differ from state to state and between individuals. Therefore, you acknowledge and agree that any insurance-related information provided by or through the Website is general information only, and may not apply to your particular situation. FMC does not endorse any insurance carrier, product, or policy and is not responsible or liable for any information provided on the website, by a HINT representative or other resource. FMC shall not be responsible for any injury, loss, or damage which occurs as a result of any statements, advice or information provided in or through the HINT program, or for the reliability or accuracy of same. In addition, any user of the HINT program who chooses to make any personally identifiable information or other information publicly available to a HINT representative or otherwise does so at his or her own risk. Such disclosures are expressly excluded from the terms of our Privacy Policy. For more information see our terms of service .